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Highlights

Canada weathered the global recession better than most other industrialized countries and is the only Group of Seven (G-7) country to have more than recovered both all of the output and all of the jobs lost during the recession.

But, the global economy has slowed recently, and uncertainty surrounding the short-term outlook has risen considerably. Canada is not immune to these international developments.

As a result, private sector economists have revised down their outlook for Canadian economic growth since the 2011 budget, particularly for 2011 and 2012. Real gross domestic product (GDP) is now expected to grow by 2.2 per cent in 2011 and 2.1 per cent in 2012.

The deterioration of the global economic situation has also begun to be felt in Canadian employment, which remains almost unchanged since July 2011. However, almost 600,000 more Canadians are working today than when the recession ended, and the unemployment rate has declined to 7.3 per cent, down significantly from a peak of 8.7 per cent during the recession.

There is considerable uncertainty surrounding the economic outlook, and the key near-term risk is the sovereign debt and banking crisis in Europe.

In light of this uncertain global economic backdrop, the Government has increased the adjustment for risk in the near term, which is applied for planning purposes to the average private sector forecast for nominal GDP.

The Government will continue to implement the Next Phase of Canada’s Economic Action Plan to support jobs and growth.

Building on the Next Phase of Canada’s Economic Action Plan, the Government announces in this Update that it will reduce the maximum potential increase in Employment Insurance (EI) premium rates in 2012 from 10 cents to 5 cents and temporarily extend the enhancement to the Work-Sharing Program.

The Government will continue to monitor closely the global and Canadian economic situation. If the economy weakens significantly, the Government is prepared to respond, as necessary, in a flexible and measured manner to support Canadian jobs and growth.

At the same time, the Government is following through on its deficit reduction action plan in order to achieve at least $4 billion in ongoing annual savings by 2014–15. These savings will support the Government’s commitment to return to budgetary balance over the medium term.

The fiscal projections outlined in this Update show that the Government remains on track to eliminate the federal deficit over the medium term.

Going forward, the Government will maintain its focus on the Next Phase of Canada’s Economic Action Plan to improve the well-being of Canadians over the long term by securing the recovery, eliminating the deficit, and investing in the drivers of long-term economic growth.

1. Supporting Jobs and Growth

The Canadian economy recovered from the global recession better than most other industrialized countries, reflecting the extraordinary measures in Canada’s Economic Action Plan and Canada’s strong economic and financial fundamentals. Canada is the only G-7 economy to have more than recovered both all of the output and all of the jobs lost during the recession. Moreover, among G–7 countries, Canada has posted the strongest growth in employment by far during the recovery (Chart 1.1).

Canada has posted the strongest growth in employment in the G-7 during the recovery

However, the global recovery has slowed recently, particularly in advanced economies, reflecting the waning effects of extraordinary fiscal stimulus measures, transitory factors such as the earthquake and tsunami in Japan, and a lack of confidence in the efforts of certain European governments to put their public finances on a sustainable path. Reflecting slower-than-anticipated global growth during the first half of this year, the International Monetary Fund (IMF) recently downgraded its outlook for growth in the advanced economies to just 1.6 per cent in 2011 and 1.9 per cent in 2012, nearly a percentage point slower in both years than projected in April (Chart 1.2).

The weakening of the global recovery is affecting Canada

Although Canada’s domestic economy is performing much better than in other advanced countries, Canada is not immune to the impact of these external developments. Indeed, private sector economists have revised down their outlook for real GDP growth in Canada since the 2011 budget, particularly for 2011 and 2012. Real GDP is now expected to grow by 2.2 per cent in 2011 and 2.1 per cent in 2012, down from expectations of 2.9 per cent and 2.8 per cent, respectively, in the budget. As a result, the projected level of nominal GDP, the broadest single measure of the tax base, is now significantly lower than the planning assumption presented in the budget. Weakness outside our borders has also been reflected in Canadian employment, which declined in October after a strong gain in the previous month, leaving the level of employment almost unchanged from its level in mid-2011.

On October 25, 2011, the Minister of Finance met with the private sector economists to discuss the economic outlook in the September 2011 survey, as well as the risks surrounding the outlook. At that time, the economists agreed that the average forecast from the September survey was a reasonable basis for fiscal planning.

The economists highlighted both upside and downside risks to the outlook, which are largely external to the Canadian economy. The key near-term risk to the outlook identified by the economists is the European sovereign debt and banking crisis. On the upside, if the package of measures set out on October 26 by European authorities to address the crisis is effective in restoring financial market stability and confidence, then growth could be stronger than projected. On the downside, ongoing uncertainty stemming from this crisis could lead to broader contagion within Europe and, ultimately, to global credit markets. In addition, the possibility of a further slowdown in the U.S. economy over the near term, and concerns over U.S. fiscal sustainability over the medium term, could also have negative implications for the Canadian economy.

In light of these risks, the Government has judged it prudent to add a downward adjustment for risk to the nominal GDP forecast used for fiscal planning purposes and to increase this adjustment for risk in the near term, when the risks are most acute.

Actions to Support Jobs and Growth

Recognizing the fragility of the global economic situation, the Government took a number of actions to secure the Canadian recovery in Budget 2011. These targeted and temporary measures to help Canadian workers and businesses include:

Providing assistance to Canada’s manufacturing and processing sector by extending the temporary accelerated capital cost allowance rate for investment in machinery and equipment for two additional years.

Providing a temporary Hiring Credit for Small Business of up to $1,000 against a small firm’s increase in its 2011 EI premiums over those paid in 2010 to encourage hiring.

Renewing the Best 14 Weeks and Working While on Claim EI pilot projects for one year to provide additional support to EI claimants.

Extending the Targeted Initiative for Older Workers to support training and employment programs for older workers.

Enhancing the Wage Earner Protection Program to cover more workers affected by employer bankruptcy or receivership.

Providing funding through the Industrial Research Assistance Program to help small and medium-sized businesses accelerate their adoption of key information and communications technologies through collaborative projects with colleges.

Investing in the creation of 10 new Canada Excellence Research Chairs and supporting joint college-university commercialization projects through the Idea to Innovation Program.

Enhancing and expanding eligibility for Canada Student Loans and Grants for part-time and full-time post-secondary students.

Advancing public-private partnerships (P3s) to produce value for taxpayers in the delivery of public infrastructure, including by ensuring that P3 proposals are developed for federal procurement projects where there is P3 potential. Through the P3 Fund, PPP Canada Inc. is supporting projects such as the extension of the Chief Peguis Trail in Winnipeg, Manitoba, to alleviate traffic congestion, and the construction and long-term operation of new water and wastewater facilities in Kananaskis Country, Alberta.

Investing in a cleaner energy economy by providing renewed funding of almost $100 million over two years for research, development and demonstrations in the areas of clean energy and energy efficiency.

By rebuilding the fleets of the Royal Canadian Navy and the Canadian Coast Guard, the Government will also create long-term jobs and generate significant economic benefits in shipbuilding and related industries across Canada. This will involve skilled work in a variety of sectors, such as steel manufacturing, information technology, and defence systems development and integration. Canadian enterprises and workers across the country will benefit through the construction of large and small vessels, as well as work related to repairing and refitting.

Federal support for provincial, territorial and municipal infrastructure has increased significantly in recent years as a result of investments under the $33-billion Building Canada plan and infrastructure stimulus measures under the Economic Action Plan. The Government also extended the deadline for infrastructure projects under four Economic Action Plan infrastructure funds to allow sufficient time for the completion of remaining projects, and to extend construction activity and the associated economic benefits into the 2011–12 fiscal year.

Despite the winding down of the Economic Action Plan, the Government continues to make substantial investments in infrastructure across Canada. These investments are maintaining and creating jobs, modernizing a broad range of public infrastructure and laying the foundation for long-term economic growth. The Building Canada plan, including contributions from provinces and territories, is expected to result in infrastructure investments of more than $26 billion over the next three years, leading to significant job opportunities. Going forward, the Government will work with provinces and territories, the Federation of Canadian Municipalities and other stakeholders to develop a long-term plan for public infrastructure that extends beyond the expiry of the Building Canada plan.

In 2007, Parliament passed a bold tax reduction plan, helping to brand Canada as a low business tax jurisdiction for investment. The final stage of this incremental reduction in the corporate income tax rate will come into force on January 1, 2012, when the federal general corporate income tax rate will be reduced by 1.5 percentage points to 15 per cent (Chart 1.3). The Government has also encouraged the provinces and territories to collaborate in supporting business investment, job creation and growth in all sectors of the Canadian economy by establishing the goal of a 25-per-cent combined federal-provincial corporate income tax rate. With British Columbia, Ontario and New Brunswick having reduced or committed to reduce their rates to 10 per cent, and with Alberta already at 10 per cent, most of the corporate income in Canada will be taxed at 25 per cent when the final stage of Ontario’s reduction takes effect on July 1, 2013.

Broad-based tax reductions play a well-recognized role in improving productivity and economic growth rates. As a result of federal and provincial business tax changes, Canada now has an overall tax rate on new business investment that is substantially lower than that in any other G-7 country, and below the average of the member countries of the Organisation for Economic Co-operation and Development (OECD) (Chart 1.4).

Canada leads the G-7 with the lowest overall tax rate on new business investment

This Update of Economic and Fiscal Projections builds on the Next Phase of Canada’s Economic Action Plan to support jobs and growth by limiting the maximum potential EI premium rate increase in 2012 and temporarily extending the enhancement to the Work–Sharing Program.

Limiting the Maximum Potential EI Premium Rate Increase

To further help Canadian workers and employers overcome challenges posed by the fragility of global economic growth, the Government will reduce the maximum potential increase in EI premiums for 2012 from 10 cents to 5 cents per $100 of insurable earnings, maintaining the same maximum potential increase as in 2011. Canada-wide, this measure will leave over $600 million in the hands of Canadian workers and businesses in 2012. The Government is currently consulting on how to further improve the EI rate-setting mechanism to ensure more stable and predictable rates going forward and will report on these consultations in the coming months.

Temporary Extension of Enhancement to the Work-Sharing Program

The Work-Sharing Program has helped stabilize Canada’s job market by providing support to thousands of employees, allowing them to continue working a reduced work week while they receive EI benefits for the days they do not work. It has allowed businesses to keep their skilled workers engaged while restructuring. Over the last three years, more than 290,000 workers have participated in work-sharing agreements. Budget 2011 made available a temporary extension of up to 16 weeks for active or recently terminated agreements. Currently, 15,000 participants continue to benefit from the Work-Sharing Program. In order to support a continued recovery for Canadian businesses and workers, the Government will provide an additional extension of up to 16 weeks for active, recently terminated or new work-sharing agreements until October 2012.

Infrastructure to Support Trade

The Government plans to modernize and expand capacity at priority border facilities across Canada. The Canadian and U.S. economies are closely integrated with about $1.6 billion of goods and services crossing the Canada-U.S. border each day, most by rail or road. Investment in modern infrastructure at key land ports will ensure that our border crossings have the capacity to support the volume of commercial and passenger traffic resulting from economic growth and job creation. The improved border infrastructure will help communities in central and western Canada. Further, these investments will benefit all Canadians, particularly those whose jobs depend on trade and those who cross the border on a regular basis.

Maintaining and Improving Federal Infrastructure

Recognizing that state-of-the-art infrastructure moves people, goods and services to markets and improves business competitiveness, allowing the economy to grow and support job creation, the Government is also making a number of important investments in maintaining and improving federal infrastructure.

The Government is carrying out capital investments to maintain and improve the safety of federal infrastructure. These assets include interprovincial bridges, such as the Macdonald-Cartier and Alexandra Bridges located in the National Capital Region, the Des Allumettes and Des Joachims Bridges connecting communities in Ontario and Quebec, and the J.C. Van Horne Bridge connecting communities in New Brunswick and Quebec; 835 kilometres of the Alaska Highway in British Columbia; the St. Andrews Lock and Dam in Manitoba; and the Kingston Dry Dock and Marine Museum in Ontario. These investments will create jobs in affected communities and ensure the assets continue to provide valuable services to the communities in which they are located.

The Government is also funding repairs and major maintenance to federal bridges in Greater Montréal, including the Champlain Bridge, to ensure that these key transportation assets continue to serve the needs of commuters while meeting the highest safety standards.

Renewal of the Inflation-Targeting Framework

The experience of the 2008–2009 global economic and financial crisis underscored the value of Canada’s flexible inflation-targeting framework, which, together with prudent fiscal policy and a sound domestic financial system, helped ensure that Canada has been one of the strongest performing advanced economies during and following the global crisis. In light of these demonstrated benefits, the Government and the Bank of Canada have agreed to renew the inflation-targeting framework for the ensuing five years.

Preserving Canada’s Fiscal Advantage

In light of the heightened risk to the short-term economic outlook, the Government has increased the adjustment for risk that is included in the fiscal forecast for planning purposes (Table 1.1). As a result, revenue projections are reduced by $3.0 billion in 2011–12, $4.5 billion in 2012–13, $3.0 billion in 2013–14, $1.5 billion in 2014–15, $1.5 billion in 2015–16 and $1.5 billion in 2016–17.

Table 1.1Increased Adjustment for Risk

2011–12

2012–13

2013–14

2014–15

2015–16

2016–17

(billions of dollars)

Budget 2011

-1.5

-1.5

-1.5

-1.5

-1.5

n/a

Update of Economic and Fiscal Projections

-3.0

-4.5

-3.0

-1.5

-1.5

-1.5

The fiscal projections set out in this Update show that the Government remains on track to eliminate the deficit over the medium term, while retaining the flexibility to respond, as necessary, to new economic developments with measured actions that will support jobs and growth (Chart 1.5).

The deficit reduction action plan will help ensure
that the budget is balanced by 2015–16

To maintain Canada’s solid fiscal position, in Budget 2011, the Government announced its deficit reduction action plan, which will review direct program spending in order to achieve at least $4 billion in ongoing annual savings by 2014–15. This review will place particular emphasis on generating savings from operating expenses and improving productivity, while also examining the relevance and effectiveness of programs. Savings proposals are currently being assessed by a specially constituted committee of Treasury Board and the Government will report on the results of this review in Budget 2012. These savings will support a return to balanced budgets by 2015–16 (Table 1.2). The budgetary savings associated with the deficit reduction action plan will be reflected in the fiscal projections once these actions are determined and implemented in Budget 2012.

Bringing the budget back to balance over the medium term will ensure that the federal debt, measured in relation to the size of the economy, resumes its downward track by 2013–14 (Chart 1.6). Canada’s federal debt in relation to the economy is expected to decline to 30.3 per cent of GDP by 2016–17. This will help to ensure that Canada meets its G-20 targets to halve deficits by 2013 and stabilize or reduce total government debt-to-GDP ratios by 2016, agreed to by G-20 leaders at their summit in Toronto in June 2010, well ahead of schedule.

The federal debt-to-GDP ratio is projected to resume
its downward track beginning in 2013–14

The commitment to return to budgetary balance over the medium term, first announced in the 2009 Update of Economic and Fiscal Projections, results from the Government’s fundamental belief that the private sector is the engine of growth and wealth creation. The role of government is to provide the infrastructure, programs and services for a prosperous economy and society at levels of taxation that are minimal and sustainable for the long term.

In meeting its commitment to return to budgetary balance, the Government will not raise taxes or cut transfers to persons, including those for seniors, children and the unemployed, or transfers to other levels of government in support of health care and social services, equalization, and the gas tax transfer to municipalities.

Going forward, the Government will maintain its focus on the priorities set out in the Next Phase of Canada’s Economic Action Plan by supporting job creation; supporting families and communities; investing in innovation, education and training; and preserving Canada’s fiscal advantage. Productive and sustainable investments in these key areas will continue to help lay the foundation for long-term economic growth and prosperity for all Canadians.